Business Valuation for Tax Planning and Succession: Value Is Not the Same as Price, Basis, or Book Equity

Value is not the same as price, basis or book equity. Tax planning uses valuation for gifts, estates, redemptions, charitable transfers, buy-sell arrangements, compensation, litigation support and business exits—often with different standards and dates.

Define the purpose and standard of value

Fair market value for federal transfer tax has a specific willing-buyer/willing-seller framework. A strategic sale price, investment value or formula price in an agreement may answer a different question.

Normalize the financial statements carefully

Owner compensation, related-party rent, discretionary expenses, one-time events and nonoperating assets can affect normalized earnings. Adjustments should be documented and supportable, not selected merely to reach a preferred value.

Use the appropriate valuation approaches

Income, market and asset approaches each fit different facts. The appraiser should explain the method, assumptions, capitalization/discount rates and weighting rather than presenting a single unexplained number.

Discounts require facts

Lack-of-control and lack-of-marketability discounts can be appropriate in some transfer-tax settings, but they are not automatic percentages. Ownership rights, restrictions and market evidence matter.

Keep valuation date and tax purpose aligned

A business can change rapidly. The value used for a gift, estate, redemption, charitable contribution or compensation analysis should match the relevant valuation date and statutory purpose.